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What Impact will Biofuels have on Organic Mmarkets?
by Corinne Alexander
Department of Agricultural Economics
Purdue University

From The New Agriculture Network's online newsletter with seasonal advice for field crop and vegetable growers interested in organic agriculture. 

The rapid growth in biofuels, primarily ethanol but biodiesel as well, is having a major impact on the commodity grain and livestock sectors. This raises the question of how these changes in the commodity sector will affect organic markets and, more importantly, the incentives to transition to organic production. The answer is complex and the purpose of this article is to examine how the changes in the commodity sector due to the increased use of crops for fuel may impact the organic market.

Let’s start with an update on how the growth in biofuels has affected the commodity sector, both in terms of prices and U.S. farmers’ acreage responses to those prices. Table 1 presents the U.S. average farm price and U.S. planted acreage for commodity corn, soybeans and wheat for the 2003/04 crop through projections for the 2007/08 crop. Over the previous four years, commodity corn was planted on roughly 80 million acres with an average farm price around $2 to $2.40 a bushel. Starting with the 2006/07 corn crop, the increased demand from ethanol plants pushed the corn price up to $3.05 for the 2006/07 crop, and the USDA is currently predicting prices in the $3 range for the 2007/08 corn crop. The higher corn prices in 2006 and 2007 have caused U.S. farmers to plant a record corn acreage at 92.9 million acres, the highest amount since 1944.

This increased corn acreage has come largely at the expense of soybean acreage, though farmers have also shifted 20 percent of the cotton acreage into corn as well. For the 2007/08 soybean crop, U.S. farmers are only planting 64 million acres compared to the 72 to 75 million acres planted the previous four years. Because of the lower planted acreage, soybean prices have increased as well with the USDA predicting soybean prices to be in the $7.25 to $8.25 range, which is markedly higher than the $5 to $6 range from the previous three years.

The case of wheat is different than corn and soybeans; this year U.S. farmers are planting slightly more than in previous years and the USDA is predicting higher prices in the $4.80 to $5.40 range. The reason wheat prices are up is because world supplies of wheat are very tight due to poor crops this year and last year in the major wheat growing countries. We can expect commodity wheat prices to remain high for the next few years for two reasons: 1) world wheat supplies need to be built back up, and 2) wheat needs to compete for acreage with corn and soybeans whose prices are high due to demand for fuel feedstocks.

Table 1: U.S. average farm price and U.S. acreage for commodity corn, soybeans and wheat.

So, what do these substantially higher commodity corn, soybean and wheat prices mean for the organic market in the short term and long term?

Short-term impacts on the organic market

In the short term, these much higher commodity grain prices will have little impact on the organic grain market. If anything, the much higher commodity wheat prices will benefit the organic wheat market. Over the last few years the organic wheat market has been trading in the $6 to $8 range according to Organic Price Index (OPX at www.newfarm.org). With commodity wheat prices in the $5 range, organic wheat has become much more competitive with commodity wheat, which will stimulate demand from consumers at the grocery store and from bakeries that may be more inclined to introduce organic products that were cost prohibitive when commodity wheat was in the $3 range.

The organic corn market is being driven by increased demand for certified organic meat, poultry and dairy products. The growth in the certified organic livestock industry has pushed organic corn prices up to the $10 range in 2007, up from the $5 to $6 range in 2005 according to OPX (July 2007). This large price increase has occurred during 2007 with organic corn prices in April at about $7 and increasing each month thereafter according to the Agricultural Marketing Service of the USDA (http://www.ams.usda.gov/mnreports/nw_gr113.txt ). With certified organic corn selling for more than twice the commodity corn price, this should limit the number of organic grain producers who shift back to conventional production.

The organic soybean market is being driven by cheap imports from China, which have kept the price of organic soybeans for feed in the $14 range. As with wheat, the much higher commodity soybean prices may stimulate demand for organic products by lowering the price differential between organic and non-organic products.

Long-term impacts on the organic market

Over the longer term, the high commodity prices may put upward pressure on organic grain prices because the higher returns to commodity agriculture will slow the transition of land into certified organic production. Commodity grain producers who were considering transitioning into certified organic production in order to increase their income are currently enjoying much higher incomes and thus will be less interested in converting to organic. At the same time, organic livestock producers will have an incentive to convert more land to organic production in order to meet their own feed needs and to protect themselves against higher grain prices.

In summary, the organic market is still fairly separate from the commodity market and prices in the organic market will be determined by the supply and demand for certified organic products. That said, the commodity market and the organic market compete for the food consumers’ dollar. Consumer surveys have shown that one of the major reasons that consumers do not purchase organic products is that they cost more than conventional products. This is where the good news about higher commodity prices comes in: higher commodity grain prices are leading to higher conventional food prices, especially cereal products and livestock products. Thus, if organic food prices stay the same or do not increase as much as conventional food prices, then organic products will be priced more competitively at the grocery store. And the really good news is that the price of organic products does not have to fall for them to be priced more competitively relative to conventional products!

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